2 June 1994 External T.I. 9410915 - TRUST - CAPITAL GAINS REALIZED BY A TRUST

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

		941091
XXXXXXXXXX	L. Holloway

Attention: XXXXXXXXXX

June 2, 1994

Dear Sirs:

Re: Capital Gains Realized by a Trust

This is in reply to your letter of April 16, 1994, concerning the taxability of capital gains realized by a Canadian resident testamentary trust, in light of proposed changes to the legislation concerning the capital gains exemption.

On February 22, 1994, the Honourable Paul Martin, P.C., M.P., Minister of Finance, tabled his budget outlining measures effectively eliminating the $100,000 lifetime capital gains exemption. This exemption was previously available to individuals who were resident in Canada throughout the year. While this exemption was never available to a trust, a trust realizing capital gains has the option of designating all or a portion of its "net taxable capital gains" to be taxable capital gains of its Canadian resident beneficiaries. To the extent that the Canadian resident beneficiaries had not previously used all of their exemption, this lifetime capital gains exemption was available to shelter accrued gains to budget day, February 22, 1994.

As a Canadian resident trust cannot designate income such as taxable capital gains to non-resident beneficiaries, the different types of income earned by a trust lose their identity when they are paid or payable to non-resident beneficiaries. Withholding tax is imposed on income of or from a Canadian resident trust which is paid or payable to non-resident beneficiaries. The tax rate is 25% in the absence of a treaty or convention that stipulates a lower rate. The Canada-U.S. Tax Convention (1980) provides that the withholding tax shall be at a maximum rate of 15% of the gross amount of such distributions.

Any income retained in a testamentary trust (i.e. not paid or payable to beneficiaries) will be taxed using the rates of federal income tax for individuals. The applicable rates for 1993 were as follows:

Taxable Income Tax

$29,590 or less 17%
$29,590 $ 5,030 plus 26% on next
$29,590
$59,180 or more $12,724 plus 29% on
remainder

To the federal tax must be added provincial or territorial taxes. These taxes can range from 45% to 69% of the federal tax amount depending on which province or territory the trust is resident.

We trust these comments will be of assistance.

Yours truly,

for Director
Manufacturing Industries, Partnerships and
Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch